Fitch Ratings Downgrades Israel To ‘A’; From A+, Outlook Negative

Fitch Ratings has downgraded Israel‘s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to ‘A’ from ‘A+’. The Outlook is Negative.

BrandNewsDay understands that the Fitch Ratings’ Key Rating Drivers that downgraded Israel, the Middle Eastern country to ‘A’ include:

Continued War Drives Downgrade: The downgrade to ‘A’ reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts. Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above to 70% of GDP in the medium term. In addition, World Bank Governance Indicators are likely to deteriorate, weighing on Israel’s credit profile.

Geopolitical Risks Underpin Negative Outlook: In their view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts. In addition to human losses, it could result in significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment, leading to a further deterioration of Israel’s credit metrics.

Regional Tensions: Tensions between Israel and Iran and its allies remain high. Hezbollah is believed to have been behind a rocket attack that killed 12 civilians in the Golan Heights on 27 July and Israel killed a Hezbollah commander on 30 July in Beirut, it is believed to have been involved in the assassination of Hamas leader Haniyeh in Iran on 31 July and attacked a Houthi-controlled port in Yemen following a drone attack on Israel. These attacks highlight the high level of tensions in the region and the risk of escalation that could further damage Israel’s credit profile.

Israel continues its operations in Gaza, having entered the City of Rafah and taken control of the border with Egypt. The war will likely continue until the end of 2024, with a risk of intense operations continuing beyond. This implies continued spending on immediate military needs and disruptions to production in the border areas, tourism, and construction. Israel has demobilised most of its reservists, reducing the impact on the workforce.

Israel-Wide Budget Deficits

Israel-Wide Budget Deficits: We project Israel’s central government budget deficit to reach 7.8% of GDP in 2024 after 4.1% in 2023. This reflects large outlays related to military operations, the mitigation of economic damage and relocation expenses for those in the northern part of the country. Revenue collection rebounded in 1H24 to a level above the amended budget and we expect it to remain strong during the rest of the year.

Debt to Rise: Fitch projects debt-to-GDP to rise to 70% in 2024 and 72% in 2025, above the 71% peak during the pandemic in 2020. However, in the event of higher permanent military spending and uncertain macroeconomic trends debt would remain in an upward trend beyond 2025. Israel’s debt is higher than the forecast ‘A’ peer median of 55% for 2025. Funding conditions have been solid during 2024 with USD8 billion issued on public markets, additional funding from private placements and robust demand for domestic debt.

Factors that Could, Individually or Collectively, Lead to a Negative Rating Action/Downgrade- Structural: Lengthening or/and escalation of the conflicts that would have a material and prolonged impact on the economy and public finances